UK tech dealflow resilient despite spectre of Brexit

The UK has typically been at the forefront of European private equity and venture capital investment in technology, accounting for 26% of the continent's aggregate deal value in the sector between 2007-2016, according to unquote" data. However, as with the financial sector, Germany and France are among a number of European countries positioning themselves to take over the mantle as Europe's main tech hub post-Brexit.

Following the referendum, trade body TechUK expressed fears about the future growth of the UK tech space after the country leaves the European Union. In particular, it argued that an end to freedom of movement will limit its members' ability to attract high-skilled recruits and that leaving the single market will impact on exports to EU countries, which account for 43% of digital exports.

"The government is likely to be looking for solutions to some of the challenges posed by Brexit. In particular, customs, the processing of visa applications, and immigration" – Allan, Global Counsel

Yet, despite the Conservative government's hard-line posturing over immigration and its determination to leave the single market, dealflow in the UK tech space has remained relatively resolute. In the first three quarters of 2017, the country accounted for 28% of European deal volume in the sector, compared with 24% in the same period in 2016, 23% in 2015 and 26% in 2014.

"Tech is one of the areas where we feel there will be opportunities post-Brexit," says Kirsty Allan, practice lead at political due diligence firm Global Counsel. "There are a couple of areas where the government is likely to be looking for solutions to some of the challenges posed by Brexit. In particular, customs, the processing of visa applications, and immigration are areas where there is going to be an increased burden on government resources."

Indeed, the implications of a hard Brexit on customs-related arrangements was behind NVM Private Equity's decision to invest £4m in customs advisory firm Customs Connect. While not a technology-driven company, it is highly likely that Customs Connect's future will be heavily tied to the success of closely related technology businesses. The most politically sensitive of such scenarios is the UK government's intention to implement technology-led approaches to avoid a physical border between Northern Ireland and the Republic of Ireland.

Automated workforce
Another area that Allan believes could see strong activity is automation and artificial intelligence. "The UK is at record levels of employment, and post-Brexit the immigration regime will be tightened to reduce the flow of workers coming to the UK," she says. "These pressures on staff availability, combined with a need to boost the UK's weak productivity performance, will drive firms to automate more quickly."

The UK has been heavily involved in the AI and machine learning space in recent years, with one example being driverless technology, which has received strong cross-party support, public investment and widespread testing. Furthermore, numerous venture firms in the country are increasing their focus on the space. At the time of closing its latest VCT fundraising, Octopus Investments said the majority of the £50m it raised would be earmarked for deals in AI and machine learning, while Pentech's £88m third fund will target software businesses relying on the same sectors.

Conan D'Arcy, also a practice lead at Global Counsel, says AI is likely to be less impacted by Brexit's regulatory implications, in large part because the industry is at a relatively early stage. "This is an area where fresh policy is being developed," he says. "EU legislation does not already have extensive provisions on it, so it means there is an opportunity to develop an innovative UK-wide framework. The government wants the UK and London to remain a tech hub, so developing a cutting edge innovative regulatory framework for artificial intelligence is quite appealing."

Fintech is arguably one of the jewels in the crown of the British technology market, and it is another area where the impact of Brexit is yet to become clear. Yet, while there remains uncertainty as to whether it will continue to attract the best EU talent, the segment will be somewhat sheltered in terms of regulatory impact, argues Lyceum Capital partner Daniel Adler. "The UK is seen as one of the most – if not the most – innovative markets in terms of regulation and how fintech operates with that regulation," he says. "Additionally, many of the areas of regulation that these companies have to operate in are actually global, so to that extent, regardless of Brexit, the frameworks will remain the same."

Investors have made numerous commitments to the country's fintech space since the referendum, including an Index Ventures-led $66m series-B for Revolut, the Accel Partners-led £82m round for Funding Circle, and an Insight Venture Partners-led $75m round for Darktrace. More recently still, the last week has seen Thrive Capital and Passion Capital take part in a £71m funding round for Monzo and TransferWise raise an eyewatering $280m series-E funding round. For now, it appears investors are relatively upbeat about the UK's tech future.

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